In macroeconomics, especially after the Latin American debt and inflationary crisis in the 1980s, privatization was widely advocated as a quick and sure means of restoring budgetary balance, to revive growth on a sustainable basis.

At the micro level, the change in ownership is often advocated to increase domestic competition, hence efficiency and encourage public participation in domestic stock market all of which is believed to promote popular capitalism that rewards risk taking and private initiative, that is expected to yield superior economic outcomes

2PrivatizationIntroduction

Employing about 19 million persons, public sector currently contributes about a quarter of Indias measured domestic output. Administrative departments (including defense) account for about 2/5th of it, the rest comes from a few departmental enterprises (like railways and postal services), and a large number of varied non-departmental enterprises producing a range of goods and services.

During the last 13 years Rs. 29,520 crores were realized by sale of equity in selected central government PSEs

3Privatizationgovernments have no business to be in business

To raise revenues for the state (and thereby to bridge fiscal deficits).

To reduce government interference in the economy and promote greater private initiative.

To promote wider share ownership and the development of the capital market.

To promote increased efficiency

4Indian perspective

This list has since been truncated to four defense, atomic energy, specified minerals and railway transport.

Disinvestment was initiated by selling undisclosed bundles of equity shares of selected central PSEs to public investment institutions (like the UTI), which were free to dispose off these shares in the booming secondary stock market. The process however came to an abrupt halt when the market collapsed in the aftermath of Harshad Mehta led scam, as the asking prices plummeted below the reserve prices. Since the stock market remained subdued for much of the 1990s, the disinvestment targets remained largely unmet.

5Disinvestment

A Disinvestment Commission was constituted to advise the government on whether to disinvest in a particular enterprise, its modalities and the utilization of the proceeds. The commission, among other things, recommended (Disinvestment Commission, 1997)

Restructuring and reorganization of PSEs before disinvestment,

Strengthening of the well-functioning enterprises, and

To utilize the disinvestment proceeds to create a fund for restructuring of PSEs.

6Criticism of divestment

Valuations processes were unsound and that the government gave away its stakes too cheaply

Disinvestment has been merely a revenue-raising affair for the government, with little thought being given to the requirements of the firms concerned

It is contended that the governments reluctance to disinvest more than 51 and relinquish control over PSUs has meant that the government has been unable to attract suitably priced bids, as bidders do not believe the firms performance would improve significantly with small government stakes being offloaded.

7Criticism of divestment contd..

Nonetheless, there are series of allegations of corruption and malpractice in many of these deals that have been widely discussed in the press and the parliament. Instances of under pricing of assets, favoring preferred buyers, non-compliance of agreement with respect to employment and retrenchment, and many incomplete contracts with respect to sale of land, and assets have been widely reported.

8Disinvestment

A separate ministry was created to speed up the process, as it was widely believed that the operating ministries are often reluctant to part with PSEs for disinvestments as it means loss of power for the concerned ministers and civil servants

9Indian perspective

Privatization in India generally goes by the name of disinvestment or divestment' of equity.

Privatization is seen as a necessary concomitant of deregulation of industry, necessary in order to enable firms in the public sector to compete and survive in the new environment. Privatization is seen as a necessary concomitant of deregulation of industry, necessary in order to enable firms in the public sector to compete and survive in the new environment.

10In mid way of disinvestment

Amid disinvestment and privatizations, some new PSEs are also created. For instance, many departmental activities were being corporatised (setting up of BSNL for instance) with a view to disinvestment. New PSEs are also formed to take up newer activities like road development corporations (promoted by state governments to execute highways and irrigation projects).

11Legal issues in the D-P process

Legality of the disinvestment process has been challenged on a variety of grounds that slowed the sale of public assets. However, there were two significant judicial rulings that broadly set the boundaries of the D-P process. These are

Privatization is a policy decision, prerogative of the executive branch of the state courts would not interfere in it.

Privatization of the PSE created by an act of parliament would have to get the parliamentary approval

12Contd..

While the first ruling gave impetus for strategic sale of many enterprises like Hindustan Zinc, Maruti, and VSNL etc. since 2000, the second ruling stalled the privatization of the petroleum companies, as government was unsure of getting the laws amended in the parliament.

Privatization at the state level

Privatization at the state level began somewhat earlier than at the Centre. Sale of the state governments equity holding in Allwyn Nissan Limited in Andhra Pradesh in 1989, UP State Cement Corporation to Dalmia Group, and Auto Tractors in 1991 were precursors to the national level policy changes. By 2003, 35 such SLPEs have been privatized. But, interestingly, over five times as many enterprises (180) were shut down during this period (Table 5).

13Assessing the principles, premises and performance of the D-P process

If privatization is seen as a means of raising resources for the budget, it can be analytically shown to be cheaper to sell public bonds than public assets.

Instead of seeking the reasons for privatization, one could instead ask why a certain firm should remain in public sector. Some would contend that with rapid technological change, natural monopoly, as a powerful argument for public ownership has simply disappeared. Such an argument would surely hold for telecommunications, not but for the rest of public monopolies.

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